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Risk-Based Approach Protects Against AML and Terrorist Financing

June 11, 2024

The Financial Action Task Force (FATF) was created in 1989. Its purpose: to establish international standards and promote implementation of risk-based measures to address money laundering, terrorist financing and other related threats to the global financial system. FATF issued guidance in 2012 and released updates in November 2023. 

The FATF approach directs financial institutions to identify, assess and mitigate their unique money laundering and terrorist-financing risks. The guidance on activities to prevent AML, money laundering and terrorist financing is flexible. This is to allow institutions to decide on the most effective use of their resources based on their specific level and type of risk. The guidance includes:  

  • Strong Customer Due Diligence (CDD)  
  • Enhanced Due Diligence (EDD) 
  • Politically Exposed Persons (PEP) identification 
  • Beneficial Ownership Documentation  
  • Suspicious Activity Reports (SARs) 
  • Internal Controls  
  • Careful Integration of New Technologies

Actions to Take
Management should review processes and ensure documentation demonstrates adequate assessment to understand how and to what extent the institution is vulnerable. This includes evaluation of the inherent market risk, the in-market business model, the internal control environment and its effectiveness, and the residual risk to determine strategic and tactical mitigation actions.

The evaluation may reveal, for example, high-risk retail activities like high-volume and high-dollar transactions to cash-intensive businesses. High-risk correspondent banking activities might include high-volume, high-dollar transactions with limited information about the beneficiary, including insufficient information about PEPs and the sending and receiving accounts’ beneficial-ownership tier structure.  

The evaluation should include analysis of a range of factors: 

  • Scale, diversity, and complexity of operations 
  • Target market demographics and current customers already identified as “high-risk” 
  • Global markets the institution is exposed to — either through its own or customers’ activities, especially in areas well-known for corruption and money laundering 
  • In-person and digital service delivery channels, including reliance on third-party vendors 
  • Internal audit results for the sizes and types of transactions related to customer profiles 

Board members can drive your financial institution’s efforts to prevent money laundering and terrorist financing by working with your management team to keep a core value of compliance top of mind, establishing strong internal procedures and controls, and implementing an ongoing, consistent training program at all levels to better identify, mitigate, and address business, financial, and operational risks.

Contact your Rehmann advisor or Joe Sarnicola at (616) 975-4100 or [email protected] for expert advice and assistance. 

 

Read the latest FATF updates > https://www.fatf-gafi.org/content/dam/fatf-gafi/recommendations/FATF%20Recommendations%202012.pdf.coredownload.inline.pdf 

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